Strong Dollar Rally Causes Gold Prices to Tumble

By Jennifer Yousfi
Managing Editor

Gold prices tumbled below $800 per ounce for the first time since late 2007 Friday, as the continuing U.S. dollar rally sparked an across-the-board retreat in commodity prices.

Gold closed Friday at $792 an ounce, a decline of $22.40, or 2.75%. Gold prices have plummeted 23% since the "yellow metal" hit an all-time record of $1,032 an ounce on St. Patrick’s Day.

“The dollar's continuing uptrend is a key factor depressing commodities in general and triggering heavy sales in gold,” Shuji Sugata, manager at Mitsubishi Corp. Futures and Securities Ltd. in Tokyo told Reuters.

Investors who had been using precious-metals investments as a hedge against a weak greenback dumped their holdings, causing the dollar to gain more than 8% against the euro and more than 5% against the yen in the past month.  The greenback hit a six-month high against the euro on Friday after reports that the Eurozone economy contracted in the second quarter. Commodity prices have fallen sharply, in general.

People are dollar-bullish at the moment,” Simon Weeks, director of precious metals at the Bank of Nova Scotia, told Reuters.

“Inflation will restrict the Fed's ability to cut rates, plus we have weaker growth in Europe, so the euro has been suffering,” Weeks added. “The dollar is coming out top at the moment, so people have been liquidating commodities.”

The U.S. dollar rally has led to a huge sell-off in commodities, which has brought prices down across the board.

Energy, grains, and precious metals have all joined the sell-off, with gold crashing through the $800 level,” Edward Meir, an analyst at MF Global Ltd. (MF), wrote in a note, MarketWatch reported.

“Not surprisingly, the dollar is stronger and weighing on the commodity complex at large,” Meir said. “With the rest of the world now joining the U.S. in slowing down, the prospects for holding the dollar have brightened considerably.”

But there are many analysts who do not share Meir’s view. Growing consumer classes in emerging markets such as China and India will push commodity prices higher for years to come as these still-nascent middle classes evolve into powerful consumer cadres with substantial disposable income.

“There's a perception that demand for commodities might be weakening,” David Jollie, editor of Johnson Matthey PLC's (PINK: JMPLF) publication on platinum-group metals, told Bloomberg News in a telephone interview from Royston, England. “North America and Western Europe are struggling, but the emerging economies remain strong.”

[Editor’s Note: Although gold prices have declined, many analysts believe the price of the yellow metal can only head higher over the long haul. If you’re in that camp, check out Money Morning’s recent special investment research report The Five Best Ways to Invest in Gold Today. The report is free of charge.]

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